Winklevoss 500k Bitcoin Argument
winklevosscapital.com
winklevosscapital.com
The more expensive bitcoin gets, the more new money has to be brought in to prop the price up.
At $500K per coin $164B per year in welfare is extracted, burned up and wasted. That's the only math you need to do, tbh, when estimating future coin value.
This is just pumping by the world's biggest bag holders.
> ...and printing money like a banana republic.
And yet, inflation is likely to achieve an effective rate of 0.44% this year.
Regarding inflation, the Fed has just confirmed yesterday their intent to increase it, they will for the first time not fight against inflation going more than 2% yearly over a period of time even...
All this money printing will end up in inflation at one point, which is also the only way to ever repay all that debt.
Their issue right now is they're tracking towards 0.44%, not 2% as they intend. Their goal is to increase inflation towards 2%.
> All this money printing will end up in inflation at one point, which is also the only way to ever repay all that debt.
This is a common misconception among armchair economists (and a great point against Bitcoin, too). The issue we're facing right now is that the velocity of money has been reduced, causing deflationary pressure (not inflation). This is typical in recessionary environments, and not at all desirable. Satoshi's will notwithstanding.
Further, as long as the expansion of the broader economy outpaces the growth in deficit it doesn't actually need to be paid back. Also, more than half of US debt is domestically held.
> BTC is obviously an asset...
Hold on now. Nobody seems to agree on that.
I can't figure out why it's not fair, though. All that matters with asset prices is whether they go up or down, not their absolute value. The whole point of assets is they go up. Your complaint is they, what, went up "too fast" or that you weren't in when they did?
> ...for me as a millennial it matters a lot that real estate price in central Europe are today 2x compared to what they were 10 years ago.
Well, inflation accounts for I suspect a whole lot of that. Inflation since 2010 is just shy of 20% for the USD. I'm unfamiliar with central European pricing so I can't comment on that specifically, however it might surprise you to know that in the US, on an inflation-adjusted dollars per square foot basis, houses cost exactly the same as they did in the 1970s. They're just twice as big now. [1]
> ...also rent is mostly not reflected correctly in CPIs.
In what way?
[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...
OOH stands for owner-occupied housing. I am aware of the fact that the US accounts far better for housing expenses in its CPI than Eurozone countries do.
And, they're expecting significant inflation - not just the higher-than historic inflation that the Fed is now officially pursuing, but even more. So Bitcoins might have a high nominal value - but it wouldn't be as much real (current-day) value as you're implying.
For example, maybe they think Bitcoin will be $500,000/each in 2030, after 2 more block-reward halvings – and a runaway-inflation 10x reduction in the real buying power of the dollar. (That'd be an atypical 10 years historically for USD – you'd have to go back to about 1954 for $10 today to have the rough buying power of just $1 then. But not uncommon across all currencies!)
A constant value doesn't quite hydro-dynamically require the inflows of other expenditures you allege. (Perception & desirability, alone, can make an asset class more $X more valuable one day, without $X actually changing hands.) But let's assume for a moment your model is "close enough".
Then in this proposed interpretation of the Winkelvosses' 2030, (1.5625 bitcoin-per-block * 144 blocks=) 225 new Bitcoin will need to be bought/held at $500K each day: that's $112.5 million in 2030 dollars, not $450 million. But because of the 10x deflator, that's only $11.25 million in current-year (2020) value per day.
Is an $11.25 million inflow-of-value per-day thinkable?
Well, Bitcoin has gone from $0 market-cap to $211 billion (CY) in 4,254 days so far. So it's taken on an average of $49 million (CY) in increased value each day for the last ~11 years. Why wouldn't demand continue, at a lesser rate – especially if Bitcoin does turn out to be an inflation safe-haven, as it was designed to be?
The price of bitcoin that is recorded on all the exchanges is merely the spot price. That spot price may or may not try to factor in such details as the total supply of the coins, but it is also likely that a lot of the buyers aren't factoring that in at all. And it is also likely that there isn't much depth to the spot price at any given time, and the bottom could fall out at any point with no warning, like a game of musical chairs, since there is no intrinsic value there except the speculative value.
I don't know how to construct even a vague estimate of coming inflation.
On the one hand, TIPS are paying a real rate of about -0.4% for 30 freaking years. If I'm not completely confused, that's saying people think locking up your money for three decades and getting less than 90% back in constant dollars is a good deal. Which sounds like deflationary expectations.
On the other hand, gold seems to be going up in the same exponential way as Apple stock. Warren Buffett supposedly was buying a gold miner.
On the third hand, the Fed seems to have declared they will stop at nothing to print money as long as unemployment is high. If they want inflation to be at least 2%, surely they can get it there?
Warrent Buffett already bought a gold miner
It is a very smart move, tbh
If stocks at some point start falling, everyone will rush even more to precious metals
1999: I was a teenager, so no stocks for me
2009: In my early twenties, no cash, not interested in the stock market
2020: Saw the potential of recovery, most money already tied up (house, stocks)
The tech companies pulled the stock market back up. The future will be in tech. So I'm not betting against tech. I do not care much about arguments, I just buy some bitcoin because I think technology is the future. Is it blockchain? I don't know, don't care, but sure I'm not gonna miss it.
Almost all people are bad at making future forecasts. So I don't.
That's a dreadful reason to invest.
There's literally a universe of things you could be investing in, from literal tulip bulbs to shovels to Apple. You should have some thesis before you throw money at things.
You need a thesis for why you think this technology is going to yield a return in excess of the S&P, otherwise you should be invested in a risk parity adjusted pairing of the S&P and treasuries. No thesis <=> reckless investment. More like gambling, tbh.
Unabashed FOMO is not an investment thesis.
I don't mean to be mean -- and I know they're not super popular with the folks on this board -- but this kind of thing is why we have accredited investor rules.
If that doesn‘t fit your criteria of what someone can do, it‘s ok, I can live with that.
He's not investing short-term so in a sense his profits will already be much higher due to "not chasing the latest fad".
Secondly, for long-term investment, I believe crude theses are sufficient. If you believe in a tech future, go for it. Be ready to lose it all but got for it.
Same goes for theses like transport revolution, war, china will be the new superpower, AI etc.
I personally don't believe in all of them but having a few of those (and diversifying also across asset classes) will either teach you wisdom and humility or net you a nice profit.
I also believe it's in the long-term bimodal - either it's factor 10+ or factor 0. So one positive investment neutralizes 9 negative, with two positives you're profiting.
My only beef with tech right now would be that it's the most crowded trade I've seen in a long time. AAPL is worth 20x BTC, add the other FANGs and draw your conclusions.
And the thesis why I think technology can outperform the S&P500 I already answered, technology companies are the ones which turned the stock market around, therefore I think technology companies will outperform the S&P500.
I'm thankful for your financial advice, but I'm good.
People thought the same 20 years ago.
I would love for them to have chosen $500,000 for that reason.
A house for instance would still be valuable because you can live in it. Facebook stock would still be valuable because it represents ownership in a real company that generates profit.
Bitcoin however is useless if you can't trade it. There is literally no reason to own Bitcoin except to eventually sell it to someone else.
Either way, both aren't particularly useful as currency because rigid deflationary currency is bad. Deflation creates inequality, and preserves inequality over time. Rigid currencies are unable to respond to shocks. They are also unable to adapt to the addition of new market participants (births).
Give me one good reason why your dollars that you earned in exchange for goods and services should be worth more tomorrow than they are today?
But but but - there's a hard upper limit!!! There's barely 3x10^19 atoms in 1 gram of gold! /s
(Obviously we could trade electrons, protons, and neutrons on a side chain to scale transactions up by almost 3 orders of magnitude...)
Wtf am I going to do with a chunk of gold?
IMO the biggest problem with most cryptocurrencies is their deflationary nature. Limited supply means they behave more like assets than currency. As currency nobody would want to spend it as they gain value over time. As an asset it lacks intrinsic value, and therefore overall market cap will tank slowly.
The problem with this argument is that you have to spend money. You have to spend it on food, lodging, entertainment, and so forth. Even if a currency is deflationary, people still have needs.
1. Nobody would store all their wealth in a deflationary currency - other forms of assets, stocks etc will still exist. They will need a high liquidity vehicle to trade a.k.a inflationary currency.
2. Deflationary currency doesn't necessarily mean it will gain value overtime. Unless it contains growing intrinsic value, the overall market cap will drop/plateau.
Think of inflation vs deflation as lubricant vs sandpaper, one encourages economic activities while the other discourages.
2. Exactly which is why people would be fine spending a "deflationary" currency
In contrast, there is no central government with military and reserves that can decide to manufacture an extra $3 trillion same price BTC on a whim to temporarily address a virus, or to devalue BTC to save the local economy, most crypto "currencies" just don't seem to work that way.
OK, so where does this factor of 45x come from? It comes from the immediately preceding sentence: "If we are right about using a gold framework to value bitcoin, and bitcoin continues on this path, then the bull case scenario for bitcoin is that it is undervalued by a multiple of 45."
Right. What is a "gold framework"? They don't say. There are some ramblings about asteroid mining and Elon Musk bringing gold back from Mars, which will "crater the price of gold". This is unclear, but I think they are trying to suggest the gold price dropping to near 0. Which seems nonsensical, since nobody will mine the asteroids if they can't expect a good return on their effort.
Aaanyway, back to the 500k: We do get this right before the "gold framework" sentence: "Today, the market capitalization of above ground gold is conservatively $9 trillion."
OK. So I think the reasoning they are hinting at goes something like this:
- the gold price will fall to near 0
- the $9 trillion dollars currently invested in gold will all be invested in Bitcoin instead
- the supply of Bitcoin is limited at 21 million
- $9 trillion / 21 million Bitcoin = $429k / Bitcoin, which = $500k / Bitcoin if you squint hard enough
- the above checks out if you assume a "real" supply of 18 million Bitcoin because some are lost
Winners and Losers
Regardless of what channel the central bank uses to inject money into the economy, the winners and losers are the same: borrowers will be rewarded at the expense of lenders and depositors.
Who seriously believes that all ways of distributing new money have the same winners and losers? Who seriously believes that quantitative easing and helicopter money / UBI have the same winners?
Why is this essay anything else than yet another hodler pumping their bags?
The problem with Bitcoin as a value store is the value it has. I'd argue that the current Bitcoin value is based on speculation and not on anything concrete. Oil and gold obviously have very concrete practical uses, since we can use them to make our cars move, our houses warm and our computers do something.
US Dollar obviously is less concrete since its value is based on people agreeing that it has a value - but it has a very large backing. Obviously there's a country where 300+ million people have agreed that the US Dollar has value and you can find someone to trade in your dollars all around the world.
Also, I'm not completely impressed with the comparison between gold and Bitcoin. First of all, fixed scarcity? Is this actually a good thing? And is Bitcoin actually scarce? How does hard forking affect the scarcity? And is there a reason why any singular fork of Bitcoin is the one and true cryptocurrency? Because if there's something with no scarcity, it's cryptocurrency in general.
"Software durability" also is pretty funny. I don't consider software all that durable. How much cryptocurrency has been stolen through software exploits, be it within a cryptocurrency itself or via some adjecent software, thus far?
Portability and storage for Bitcoin also sound pretty good at first. However, if you're thinking about a value storage, is portability actually that good? If I want to store $500k as an asset, I don't actually want it to be that portable since I don't want anyone else be taking it. $500k in gold is like 8 kg, so at least it's not something that someone can sneak out or take from across the world. And a safe or vault have costs associated with it, that's what I want for value storage.
Bitcoin just "is", how you decide to use it is up to you.. that's the whole point. IMO for it to be money it would need to be adopted for 3 use cases SoV->MoE->UoA, in that order.
> Bitcoin value is based on speculation
Yeah, seems like a lot of people are betting that it will be the global money in the future, so they are building positions now. That's why you get this nice market signal - bitcoin's price increasing relative to other monies, before it has actually become money.
> First of all, fixed scarcity? Is this actually a good thing? And is Bitcoin actually scarce? How does hard forking affect the scarcity? And is there a reason why any singular fork of Bitcoin is the one and true cryptocurrency?
Yes. Yes. Yes. How does the scarcity of Swiss Francs affect the scarcity of Japanese Yen? Not directly, but I'm sure there is some effect. People disagree about this, but IMO Bitcoin is the fork that the majority of economic actors on the network use.
> "Software durability" also is pretty funny
They're referring to the Bitcoin consensus code I think.
> How much cryptocurrency has been stolen through software exploits
Compared to the amount of gold and fiat that's been stolen, I would say not much.
> However, if you're thinking about a value storage, is portability actually that good?
It is. Certainly if you need to escape some increasingly repressive regime. If I was an activist trying to get out of Hong Kong right now, I certainly wouldn't be carrying bricks of gold with me.
In 2010 Bitcoin had a critical bug (integer overflow) which resulted in hundreds of millions of BTC being created. At the time the network was small enough that users accepted the patch for it which forked the chain.
In 2018 another inflation bug was found by a Bitcoin Cash developer who was kind enough to fix it instead of take advantage of it himself.
Bitcoin is just software. Lots of people involved in Bitcoin don't know anything about software and treat it like a religion. Bitcoin can barely do a few transactions per second even when it's main use case is leverage trading on exchanges. I'm sorry but that'll never be how you take over the world's payments.
Instead of innovating on the software, the Bitcoin cult just declares it "done". I like Bitcoin but the community has actively sabotaged the project. It looks like the one world currency will be Libra (or similar) instead. Maybe that's not such a bad thing.
Bitcoin can be forked and has been many times but the fork with the most proof-of-work is generally considered the 'one true Bitcoin'. This proof-of-work (aka longest chain) metric provides a way to measure the relative scarcity of various cryptocurrencies.
Me neither.
Gold may have a finite supply, but it's been mined for millennia and has slowly increased its supply rate over time, and will likely continue to do so in our lifetime.
In contrast, Bitcoin's emission which ranges from 2009 through 2140 is heavily tilted to the first few years.
Its final century from 2040 through 2140 accounts for only about 0.5% of emission.
The only point of the halvings is to be able to claim "finite supply". A constant reward would still have the yearly supply inflation rate (stock to flow ratio) going to 0, albeit more slowly. So crucially, supply would still be scarce, would be more predictable (time independent), more fair to late adopters, and be much closer to Gold's emission over our lifetime.
It would also avoid the inherent instability [1] of mining rewards dominated by transaction fees, and avoid lengthening confirmation times to maintain security against double spending [2].
If we further consider the fact that coins inevitably get lost, then even a constant reward will yield a softcap of supply, where yearly emission merely serves to balance the yearly losses.
[1] https://www.cs.princeton.edu/~arvindn/publications/mining_CC...
[2] https://www.coindesk.com/the-halving-exposes-bitcoin-to-51-a...
>Bitcoin is not just a scarce commodity, it’s the only known commodity in the universe that has a deterministic and fixed supply. As a result, bitcoin is not subject to any of the potential positive supply shocks that gold (or any commodity for that matter) may face in the future.
This doesn't mean a thing and I would argue isn't true. 4th generation Toyota Supras are also a fixed supply, yet the value of these cars has fluctuated wildly and will continue to. There won't be a single new 4th gen Supra produced. I would argue vintage cars are the most similar asset to bitcoin. Since like cars, some bitcoin is continually lost and destroyed every day. Like bitcoin, cars are simply worth whatever someone is willing to pay. The market for cars is not logical, it is purely emotional. Yes, toyota supra prices will likely not collapse anytime soon, since they look cool and there are less and less examples every day. But anyone making an argument that bitcoin is an effective money store needs to consider all the things that can go wrong, and cannot argue that bitcoin is anything better than gambling. The market is not logical, since the market is simply people, and thats the first assumption that is wrong here.
my net worth sure could
wanna bet that's true in the aggregate as well?
The Feds "saved the economy" with the massive QE, Trillion dollars stimulus. What could they have done if currency was all bitcoin?
Say I have precious metal in safes at some banks, good luck to steal it from me overnight. Now imagine people get a digital wallet on their smartphone. It's now easier to rob them of their lifetime savings, in the stealthiest manner ever. Surely easier than to mine the asteroid next door. Software bugs, hardware backdoors, social engineering, or just not understanding how it works... even the most tech savvy is at risk.
The problem with gold is centralization. Large capital investment prevents smaller players to participate. Nation states also monopolize the existing gold supply. New gold from space is likely going to end up in central banks' reserve.
Bitcoin faces the same problem with centralization. The hard cap makes Bitcoin even easier to manipulate. Nation states can pump and dump retail investors out of the game. Don't fight the Fed. If the Fed decides to enter the Bitcoin game, investors are going to lose. Once nation states monopolize the Bitcoin supply, we're back to the same situation like gold. Making decentralized money is not that easy. Bitcoin alone cannot fix everything.
If one day I came up with a nuclear reactor that turned rocks into gold, maybe the market might drop the price of gold, and it would collapse just the same. And it will happen, just probably not in our lifetime.
You can imagine someone burying at the beginning on iron age (which happened less than 5000 years ago) big chunk of this wondrous, rare and hard to work with material. And today we are making insanely huge buildings out of it.
You can eat them. If you salt them, they'll last a long while.
1. Introduce FedCoin - a compatible fork of Bitcoin pegged to the US dollar by the Fed.
2. Ban all US companies and citizens from buying, selling, exchanging, or trading in, alternative cryptocurrencies (such as Bitcoin).
3. Set the initial Fedcoin difficulty lower or comparable to Bitcoin, but peg the initial price higher in USD (the Fed can do this because they can print unlimited dollars).
4. Watch as every Bitcoin mining operation on the planet leaves Bitcoin in droves to mine FedCoin.
5. Watch as all but the diehard US holders of Bitcoin sell, causing the price to crash (further disincentivizing miners)
This isn't entirely dissimilar to how the US destroyed the Gold market to hoover up all the Gold in the early 20th century.
Now I don't think this is going to happen just because enough people in government own BTC at this point, but it's not impossible. And it has nothing to do with the resilience of the computing network. You could mine Bitcoin over TOR or I2P to keep the network alive but it won't matter.
To kill Bitcoin entirely the Fed would likely have to convince the FedCoin miners to periodically launch 51% attacks against the Bitcoin blockchain.
Nice way to put it.